March 20, 2020 / 1:32 PM / 2 months ago

UPDATE 1-Swap lines no fix for emerging markets trounced by strong dollar

(Updates pricing)

By Vidya Ranganathan

SINGAPORE, March 20 (Reuters) - Persistent weakness in emerging Asian currencies on Friday and enduring stresses in dollar funding markets showed that a spate of hurried swap lines between central banks had done little to alleviate the credit strains at the heart of the problem.

Currencies such as the South Korean won came off their lows, but only very slightly, after the U.S. Federal Reserve signed swaps with the central banks of Australia, Brazil, South Korea, Mexico, Singapore, Sweden, Denmark, Norway and New Zealand to allow them to tap up to $450 billion.

That money is meant to help markets scrambling to get their hands on U.S. dollars because of worries about how badly the coronavirus pandemic will hit businesses and the world economy.

“More dollar swap lines with central banks will be needed before the global economy stabilizes, but at some point, there will be enough dollar supply to calm the markets,” said Montreal-based Mathieu Savary, a strategist at BCA Research.

“Gold prices are an indication that we are not there yet in terms of sufficient dollar liquidity.”

Prices of safe-haven gold are down more than 2.5% this week as investors rushed to dump the most liquid assets in a bid to raise cash.

Dollar funding remained at a premium, with investors paying 169 basis points (bps) over interbank rates to swap 3-month Korean won into dollars, nearly three times the level last month.

They were paying 46 bps more than interbank rates to swap euros into dollars on Friday, half the level of earlier this week but still three times the average premium last month.

The won is off the 2008 lows it hit on Thursday but still down 9% in two weeks.

The central bank swaps had managed to get more dollars into the banking system but the flow of that cash into brokerages, companies and other end users of dollar funding was still hamstrung by concerns over credit quality, analysts said.

And those would persist until wider concerns over economic activity, which has ground to a near halt on account of the virus, abated.

“While the additional swap lines announced by the Fed today seem to have given respite to a few embattled currencies, they may not be sufficient to stop the dollar in its tracks,” Oliver Allen of Capital Economics wrote, terming the swaps as “a necessary, but not sufficient, condition to turn the tide.”

“A sustained retreat of the dollar may have to wait until the coronavirus outbreak shows clear signs of fading.”

Thursday’s swaps were in addition to the permanent swaps the Fed has with central banks in Canada, the United Kingdom, Japan, Switzerland and with the European Central Bank.

The Federal Reserve provided $45 million of liquidity to foreign central banks in the latest week via its swap lines, the New York Fed said on Thursday.

The rush for dollar funding has pushed the dollar up 5% this month against a basket of peers, and sent almost every other currency reeling.

The biggest losers in emerging markets have been the higher-yielding ones sought by portfolio managers with heavy amounts of cheap dollar funding.

The dollar is up more than 16% this month versus the Russian rouble and 17% against the Mexican peso. Others such as the Indonesian rupiah, Turkish lira and South African rand also have suffered big losses.

In a further sign of the pressure, implied volatility for the currencies of several emerging markets, including Russia , Mexico and Turkey has risen sharply.

Central banks in Indonesia, India, South Korea, South Africa, New Zealand, Russia, Brazil and other places have intervened to prop up their currencies, offered dollar funding, or both. Denmark raised rates to defend its currency, even as other central banks cut them to bankroll businesses impacted by the pandemic.

Additional reporting by Tom Arnold; Editing by Kim Coghill, Kirsten Donovan

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